The Kentucky Chamber of Commerce on Thursday asked state Auditor Adam Edelen to conduct a performance audit of the Kentucky Retirement Systems, citing the "significant threat" posed by $13.9 billion in unfunded state pension obligations.
"The business community is concerned about the overall financial condition of our state, and we feel like we need to add our voice to some of the conversation that has been going on for some of the last few months," Chamber president Dave Adkisson told reporters.
A fast-growing share of the state budget is being consumed by pension costs even as the system's debts are damaging the state's credit rating, making it more expensive for government agencies and other public entities in Kentucky to borrow money, Adkisson said.
In a prepared statement, Edelen said he appreciated the Chamber's concern, but he has not made a decision about auditing KRS.
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"At least three major reviews of the public pension system have been conducted in recent years, including one by this office," Edelen said. "For this proposed exam to add value and bring about real fixes to the system, it will require broad, bipartisan support and additional resources for our office to conduct the highly-technical work. We have begun discussing the matter with stakeholders."
KRS is responsible for pension and health care benefits for several hundred thousand state and local government employees and retirees. It's widely considered one of the worst-funded public pension systems in the country, due largely to inadequate contributions for more than a decade by Kentucky's governors and legislators. The primary pension fund for state workers is only 21 percent funded.
Specifically, the Chamber on Thursday asked the auditor to investigate how KRS' investment performance compares to pension systems in other states, as well as to Kentucky's separately managed, and much better funded, retirement plans for state legislators and judges. The auditor also should ask how KRS and its actuarial advisers determine the systems' liabilities, Adkisson said.
Finally, the auditor should review KRS' policy of refusing to publicly disclose the tens of millions of dollars in fees that it pays every year to individual investment advisors, Adkisson said. It would be interesting to see if any other public pension systems disclose those fees, and if so, if it harms them in any way, he said.
"We are concerned about the transparency related to those fees," Adkisson said.
Bills already have been pre-filed for the 2015 General Assembly that would require greater transparency from KRS, including disclosure of individual investment fees. But House and Senate leaders have blocked such measures in the past.
Bill Thielen, KRS executive director, said his agency would cooperate with a performance audit just as it has with other reviews in recent years by the state auditor, the U.S. Securities and Exchange Commission and staff investigators for the General Assembly.
While underfunding is a serious problem for KRS, Thielen said, past reviews turned up only one instance of questionable management. In 2011, state auditors identified $11.6 million in fees paid or committed to "placement agents," middlemen who help private investment firms sell their products to KRS. One placement agent, Glen Sergeon of New York, enjoyed close access to KRS through his relationship with Adam Tosh, then KRS' chief investment officer, yielding Sergeon nearly $6 million in fees, auditors said. Tosh resigned in 2010 after being questioned about Sergeon.
"In no case has anything been turned up, with that one exception, that has been out of sorts or illegal or unethical," Thielen said.